14
Outline
Reinsurance Accounting

DUAL ACCOUNTING SYSTEMS                                           597
     SAP Versus GAAP
     Reporting Differences

REINSURANCE ACCOUNTS AND DIFFERENCES                   605
     Accounting Entries
     Major Accounts
       Reinsurance Premiums
       Loss Indemnities
       Loss Adjustment Expenses
       Reinsurance Commissions
     Differences Between Insurance and Reinsurance Accounting
       Accounting Periods
       Premium Bases
       Terminating Losses: Cutoff or Runoff

GOVERNMENT AND SELF REGULATION OF ACCOUNTING     631
     The NAIC’s Chapter 22
     Schedule F
     Accounting Bases and Data

CALCULATIONS                                                                642
     Proportional Treaties
       Quota Share
       Surplus Share
       Commission Adjustments
       Loss Corridor Deductible
     Nonproportional Treaties
       Per Risk Excess
       Per Occurrence Excess (Catastrophe)
       Aggregate Excess
       Aggregate Catastrophe Excess
       Stop-Loss Excess
       Common Account Excess
     Retrospective Premium Adjustments
     Portfolio Transfers

SUMMARY                                                                       690

14

Reinsurance Accounting

by Kevin B. Oates, Jr. *

     Reinsurance accounting can be described as a subset of property and casualty insurance statutory accounting. All licensed insurers, whether primary, policy-issuing companies or reinsurers, are subject to the same insurance statutes, regulated by the same state insurance departments with their rules and regulations, examined periodically by state insurance examiners, required to comply with the same statutory accounting procedures (SAP), and report on the same Annual Statement with details of assets, liabilities, income, and expenses. Many primary insurers are also reinsurers when licensed to write reinsurance in addition to insurance, although most of them choose to concentrate on primary insurance underwriting.

     Statutory accounting requirements may not be the only accounting system to which the insurer is subjected. If the company's capital stock is publicly traded, it must comply with regulations of the Securities and Exchange Commission, an agency of the federal government, which requires financial reporting in accordance with generally accepted accounting principles (GAAP). The two accounting systems described below contrast SAP requirements with those of GAAP, used also by noninsurance businesses.

DUAL ACCOUNTING SYSTEMS

SAP Versus GAAP

     Statutory accounting procedures consist of rules, regulations, and state laws of the fifty states that authorize regulatory authorities (insurance commissioners, superintendents, or directors) to regulate the insurance industry, of which reinsurance is a part. Their objective is to achieve conservative, pragmatic goals of public policy. Authority for GAAP, on the other hand, emanates from the public in general, evolving to meet the needs of general business activities.

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* M.B.A., President, FELLS ROAD GROUP, INC. and MICHAEL CONN ASSOCIATES, INC., 271 Route 46 West, Building D, Suite 207, Fairfield NJ 07004. This chapter is copyrighted by its author, whose autobiography follows the chapter.

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* Vice President and Manager, Claims Management Division, NAC REINSURANCE CORPORATION, P.O. Box 2568, One Greenwich Plaza, Greenwich, Connecticut 06836-2568. An autobiography follows the chapter.

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